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FINANCIAL WEALTH, AGGREGATE DEMAND DETERMINANT: One of several specific aggregate demand determinants assumed constant when the aggregate demand curve is constructed, and that shifts the aggregate demand curve when it changes. An increase in financial wealth causes an increase (rightward shift) of the aggregate curve. A decrease in financial wealth causes a decrease (leftward shift) of the aggregate curve. Other notable aggregate demand determinants are interest rates, federal deficit, inflationary expectations, and the money supply.

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INDEX OF CONSUMER SENTIMENT:

A measure of consumer attitudes, preferences, and expectations concerning the state of the economy and business-cycle conditions that is compiled each month by the Survey Research Center at the University of Michigan. The Index of Consumer Sentiment is one of two primary measures of consumer attitudes. The other is the Consumer Confidence Index developed by The Conference Board.
The Index of Consumer Sentiment is a notable measure of consumer attitudes that has consistently demonstrated its value as an indicator of future economic conditions.

This index incorporates the notion that consumer expenditures are a critical component of aggregate demand for the macroeconomy. Changes in consumer confidence and attitudes affect consumer expenditures, which then affect the overall performance of the economy.

In other words, if consumers are more confident, then they spend more and the economy is likely to expand. If consumers are less confident, then they spend less and the economy is likely to contract.

Survey of Consumers

The Survey Research Center at the University of Michigan undertakes a monthly Survey of Consumers that is conducted with a randomly selected, representative sample of approximately 500 U.S. households. Each household is asked a series of questions that seek to identify attitudes concerning current and expected conditions of the economy. Within this survey are five key questions used to calculate the Index of Consumer Sentiment.
  1. An evaluation of the respondent's current financial situation.
  2. Expectations of the respondent's financial situation in one year.
  3. Expectations of the economy's overall financial situation in one year.
  4. Expectations of the economy's overall financial situation over the next five years.
  5. An evaluation of the economy's overall suitability for making major purchases.
Each question has three basic responses--better, same, or worse.

In addition to the five questions used to calculate overall consumer confidence, the Survey of Consumers also poses questions dealing with government stabilization policies; expectations of economy-wide unemployment, interest rates, and inflation; expectations of family income; and possible plans to purchase housing, cars, furniture, appliances, and other durable goods.

A Family of Three

The five main questions are used to generate three separate confidence indices. The first step in the derivation of each index is to calculate relative scores for each question. The relative score is the percent of favorable responses to a question, minus the percent of unfavorable responses, plus 100, the result of which is then rounded to the nearest whole number.
  • Index of Consumer Sentiment: This is the primary index generated from the study. It is calculated by summing the relative scores for all five questions and dividing by the relative score in the base year of 1966. (A constant value of 2.0 is added to the result to adjust for changes in the 1950s).

  • Index of Current Economic Conditions: This index is calculated as an average of the relative scores to questions 1 and 5. Both questions reveal how respondents feel about current personal and economy-wide conditions. It too is indexed against the relative score for 1966 and a constant value of 2.0 is added.

  • Index of Consumer Expectations: This index is calculated as an average of the relative responses to questions 2, 3, and 4. These three questions reveal expectations that respondents have about future personal and economy-wide conditions. It is indexed against the relative score for 1966 and a constant value of 2.0 is added, as well.

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Recommended Citation:

INDEX OF CONSUMER SENTIMENT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2017. [Accessed: June 23, 2017].


Check Out These Related Terms...

     | Consumer Confidence Index | National Bureau of Economic Research | Conference Board, The |


Or For A Little Background...

     | business cycles | expansion | contraction | business cycle phases | business cycle indicators | leading economic indicators | coincident economic indicators | lagging economic indicators |


And For Further Study...

     | demand-driven business cycles | investment business cycles | political business cycles | stabilization policies | economic growth | full employment | potential real gross domestic product |


Related Websites (Will Open in New Window)...

     | University of Michigan Survey Research Center |


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